Sexy or Safe: Why do Predicted Stock Issuers Earn Low Returns?

Predicted stock issuers (PSIs) are firms with expected “high-investment and low-profit” (HILP) profiles that earn unusually low returns. We carefully document important features of PSI firms to provide new insights on the economic mechanism behind the HILP anomaly. Our results show top-PSI firms are cash-strapped and dependent on external financing, have lottery-like payoffs, high volatility, high Beta, and high shorting costs. Over the next two years, top-PSIs earn return-on-assets of -30% per year, report disappointing earnings, and experience strongly-negative analyst forecast revisions. They earn especially low returns in down markets and are nine times more likely to delist for performance reasons. We conclude that HILP firms earn low returns not because they are safer, but because they are more salient (i.e. sexier) to investors and are thus overpriced.

Moderator: Professor Bernard YeungDean and Stephen Riady Distinguished Professor in Finance and Strategic Management, National University of Singapore
President, Asian Bureau of Finance and Economic Research (ABFER)

Speaker

Professor Charles Lee

Moghadam Family Professor of Management and
Professor of Accounting, Stanford University
Co-Founder, Nipun Capital
Senior Fellow, Asian Bureau of Finance and Economic Research
(ABFER)

Charles M. C. Lee is the Moghadam Family
Professor of Management and Professor of Accounting at the Graduate School
of Business (GSB), Stanford University. He is also Co-Founder of Nipun
Capital, a San Francisco based asset management firm focused on Asian
equities. Professor Lee studies the effect of
human cognitive constraints on market participants and factors that impact
market pricing efficiency. He has published extensively on topics that span
behavioral finance, financial analysis, market microstructure, equity
valuation, quantitative investing, and security market regulation. From 2004
to July 2008, he was Managing Director at Barclays Global Investors (BGI;
now Blackrock), where he served as Global Head of Equity Research and
Co-Head of North America Active Equities.

Professor Lee has received numerous honors and awards for his research and
teaching. He has also served as either Editor or Associate Editor of a
number of academic journals, including: the Journal of
Finance, The Accounting Review, the Journal
of Accounting Research, the Journal of Accounting and
Economics, the Review of Accounting Studies,
Management Science (Finance), and the Financial
Analysts Journal.

Professor Lee received his BMath from the University of Waterloo (1981), and
his MBA (1989) and PhD (1990) from Cornell University. He has been a faculty
member at the Michigan Business School (1990-95) and the Johnson Graduate
School of Management, Cornell University (1996-2004). From 1995-96 he was
Visiting Economist at the New York Stock Exchange. At Cornell he held the
Henrietta Johnson Louis Professorship in Management and was Director of the
Parker Center for Investment Research. He also served as Co-chair of the
Accounting Department at Guanghua School of Management, Peking University
(2003-2015).

Prior to entering academic life, he spent five years in public accounting,
the last three in the National Research Department of KPMG, Toronto, Canada.
He holds a Certificate in Biblical Studies from Ontario Theological
Seminary, and is fluent in Mandarin Chinese.

Professor Bernard Yeung

Dean and Stephen Riady Distinguished Professor
in Finance and Strategic Management, National University of Singapore
President, Asian Bureau of Finance and Economic Research
(ABFER)

Bernard Yeung is the Dean and Stephen Riady
Distinguished Professor in Finance and Strategic Management and President of
the Asia Bureau of Finance and Economic Research at National University of
Singapore (NUS) Business School. Before joining NUS in June 2008, he was the
Abraham Krasnoff Professor in Global Business, Economics, and Management at
New York University (NYU) Stern School of Business. He has also served as the Director of the NYU China
House, the honorary co-chair of the Strategy Department of the Peking
University Guanghua School of Management. From 1988 to 1999, he taught at
the University of Michigan and at the University of Alberta from 1983 to
1988.

Professor Yeung has published widely in academic journals covering topics in
Finance, Economics, and Strategy; his writing also appears in top-tier media
publications such as The Financial Times and The Wall Street Journal.

He has also won several scholarly honours and awards for academic
excellence, including the Irwin Outstanding Educator Award (2013) from the
Business Policy and Strategy (BPS) division of the Academy of Management and
Teaching Excellence Awards in NYU’s Stern School of Business and University
of Michigan’s Ross School of Business. He is an election Fellow of the
Academy of International Business.

Professor Yeung is a member of the Social Science Research Council (SSRC) in
Singapore. He was a member of the Economic Strategies Committee in Singapore
(2009) and also a member of the Financial Research Council of the Monetary
Authority of Singapore (2010 -2013).

Professor Yeung sits on the 3rd Advisory Board of the Antai College of
Economics and Management at Shanghai Jiao Tong University, the Research
Advisory Council of the Centre for Advanced Financial Research and Learning
(CAFRAL), Reserve Bank of India, the Advisory Council of the Economics and
Management School of Wuhan University, and an independent Non-executive
Director of the Bank of China (BOC) Aviation Limited.

Professor Yeung received his Bachelor of Arts in Economics and Mathematics
from the University of Western Ontario and his MBA and PhD degrees from the
Graduate School of Business at the University of Chicago.